Is There Skill or Alpha in Currency Investing?
Momtchil T. Pojarliev
Richard M. Levich
New York University, Stern School; National Bureau of Economic Research (NBER)
April 11, 2011
Midwest Finance Association 2012 Annual Meetings Paper
In this paper, we provide an overview of the main features of active currency management programs, highlighting the mandates and the types of trading strategies that are often used. The traditional benchmark used to measure skill or alpha in currency investing is that the expected excess rate of return is zero. We offer an alternative standard where the expected rate of return is related to naïve style factors based on strategies that an investor could adopt assuming no special expertise. We review empirical evidence on the performance of both individual currency fund managers and indices of managers using the alternative benchmark. We find that a large percentage of variation in currency fund returns can be attributed to style indices. As a result, performance measures and rankings of currency funds may vary greatly depending on the benchmark used. We review related empirical evidence on fund management styles and survivorship and discuss the implications for currency management strategy and setting currency fund management fees.
Number of Pages in PDF File: 47
Keywords: Foreign Exchange, Hedge Funds, Manager Selection
JEL Classification: F31working papers series
Date posted: September 19, 2011 ; Last revised: September 21, 2011
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